US ECONOMY IS BAD, BUT NOT AS BAD AS SOME SAY

….This shows how bad the 2^nd quarter was…

Wish the US Commerce dept would show both the annualized numbers and the quarterly numbers.

The US Commerce Department opened its latest presentation with an announcement of second-quarter economic growth with an eyeball-blistering observation: “Real gross domestic product (GDP) decreased at an annual rate of 32.9% in the second quarter of 2020.”

The US economy contracted at the fastest quarterly rate on record from April to June as coronavirus walloped workers businesses.  Now this is true, but not exactly the way they have stated.

That 32.9% represents the loss of a third of the economy.  Let that sink in. Now, let it wriggle back out again, it is not exactly true.  And why is that?  The US Commerce Department reports quarterly GDP at an annual rate to allow easy comparisons to other time periods. Remove the annualization, and we see the economy contracted a still-poor 9.5%.

In other words, 32.9% is how much the economy would shrink if the business closures and spending cuts of the second quarter increased at a compounding 9.5% for the entire year, after it was adjusted seasonally.

Think of what an apocalypse that would be.  Annualization assumes the businesses that closed this last quarter would remain closed.  Also, that just as many more would close in the third quarter.  And we’d expand the closures again in the fourth quarter and again in the first quarter of next year.  Now this may still happen, but let's let it happen on its own.  We don't have to assume that will be the case.

If you take the devastation you saw in the past three months and then multiply it by four, that is essentially what this annualizing does.

The US Commerce Department’s affection for annualization does not stop at percentage changes. It also reports quarterly GDP totals at an annualized rate.  That means when Commerce says GDP was at $17.2 trillion in the past quarter, it means GDP would be at $17.2 trillion if this quarter’s $4.3 trillion in output continued for a full year.

With that in mind, here is US GDP, adjusted for inflation and reported as quarterly totals..

A 32.9% drop would mean a loss of about $1.6 trillion from last quarter. In fact, the economy only shrank $0.45 trillion in the second quarter, on the heels of a $0.06 trillion (1.3%) decrease in the first quarter of 2020.

To see a third of the economy truly vanish, you need to look back at the Great Depression.  From 1929 to 1933, GDP contracted about 36%, according to data collected by today’s economists. That is the actual contraction w/o any annualization .

Commerce Department data, which start in 1947, show the previous worst quarter on record was a 2.6% drop in 1958. That contraction just happened to coincide with the “Asian flu” pandemic, which claimed about a million lives worldwide.

With the expanded data, we can establish that a drop of 9.5% makes this quarter the worst since at least 1875.  The next worst were in 1893, when a legendary panic and run on the banks resulted in a long, painful depression, and 1937, when the Great Depression took a turn for the worse. Then, we saw drops of 8.4% and 7.2%, respectively.

The point is that, “Yes, the economy took a big hit due to the pandemic.”  And based on the man in the White House today, it will continue for some time.  But, by annualizing the first quarter loss, it is saying that the whole year is screwed before the year’s actual quarterly numbers have been accumulated.

It’s true that we could be headed for an economy as bad as the annualized numbers, but today, that’s putting the “cart before the horse”.

Let’s let the quarterly number speak for themselves before we start yelling “fire” and writing off our economy. 

The greatest nation ever created still has great resources that could save all of us “if” the US Congress and the executive branch would get their act together.

But that’s a bigger “if” than if we will have a Covid-19 vaccine by the end of the year.

Copyright G. Ater 2020